Over the past few weeks, sections of the press have created a controversy over the sale and resale of Kotagala Plantations. Even though the press seems bent on exposing some major irregularities or illegalities in these transactions, they have not yet succeeded in doing so. However, what has really come to light as the story unravels is how small, incestuous, and unstructured our business world is: the same players appear to be everywhere. Non both sides of the transaction ¥ wearing different hats.
In the case of Kotagala Plantations, it has been revealed that a member of the Public Enterprise Reform Commission (the body overseeing and regulating privatisation) was also on the board of a company involved in the eventual purchase (the company being overseen and regulated by PERC). It has also been revealed that a lawyer advising PERC was also on the board of (and possibly advising) the company involved in the eventual purchase.
Although it is only these individuals that have been pinpointed by the press, it is evident that some others who have been closely involved with PERC have also been closely involved with companies that have purchased or seek to purchase enterprises being privatised. All the individuals involved are distinguished members of our business community and, in spite of all the screaming headlines in the press, it remains very unclear whether there was anything irregular about any part of the transactions. It must be said, however, that this tendency to draw extensively from only a handful of top business leaders to play key roles both in the private sector and on highlevel government commissions leaves a lot of room for conflict of interest situations to arise.
It is an accepted fact that the market economy is fueled by selfinterest. Individuals and companies make decisions in this market in a manner that optimises their utility. If an individual is on both sides of a transaction, a difficult situation would arise. He/she would have to consider the interest of both parties and take one approach and there will inevitably be a tendency to compromise the interest of one party or the other, or both. (In the case of a privatisation, he/she has to consider the national interest on one side, and the company's interest,and his/her selfinterest since he/she will enjoy the dividends of the transaction, on the other side.) Therefore, allowing room for the same people to be one both sides of a transaction is an impediment to the smooth functioning of the market economy.
Conflicts of interest arise, in these situations, not as a result of a weakness on the part of the individuals concerned but from the mere fact that they are part of the decision making processes of parties on opposite sides of a transaction.
A quick look through the Handbook of Listed Companies published by the Colombo Stock Exchange indicates that there are a handful of top business people who serve as directors of many quoted companies. Some are directors of more than 8 quoted companies. If private companies are included in this count, it is likely to show that several leading business people are directors of more than 15 companies in all sectors of the economy. Many of these individuals also serve on national commissions or boards that have the authority to make important economic or financial policy decisions.
While the potential for conflicts of interest is quite disturbing, the other issue this raises is the obstacle this current tendency poses to developing management succession in the private sector. In a society that values and reveres the patronage and involvement of its distinguished, senior members (in this case, business people), it is easy to overlook the need to give younger members the opportunity and the responsibility to develop their management and leadership skills. It is not difficult to understand the companies desire to show impressive names on their Boards of Directors. It is important, however, to start moving away from overreliance on this small group toward grooming a broader base of younger executives to lead us into a more formally and professionally structured business world.
At a recent press briefing the powers that be gave an assurance that the two big banks, those serving the people and Ceylon, will not be privatised.
But this has confused the treasury boys who say that a large scale restructuring tantamount to privatisation has already been agreed on. So what is this talk of no privatisation, they ask.
Was it just an answer to a question on the spur of the moment, or is there a change of policy, they want to know...
The bird of paradise has taken wing to Africaaner land and all seemed well for a while with a lot of talk about promoting trade between the two countries.
But now, there have been protests saying that the route is far from profitable and queries are being raised as to who finally authorised the new route.
A lot of explanations have been called and even the amiable man in charge of aviation may have some explaining to do...
Pirating well known brand names and producing counterfeit goods is nothing new, but a leading electrical appliance manufacturer from Britain saw red recently when it saw the pirated stuff-it looked an exact replica and only a lot of scrutinising could tell the difference.
Now, they are contemplating legal action against those who distributed the fake goods but are complaining that copyright laws in this country are not stringent enough....
The Merchant Bank of Sri Lanka (MBSL) which posted a Rs 37mn loss for the first quarter of 1996 has said it will not takeover an auction off assets of borrowers who are facing financial difficulties in the present economic climate.
"The bank has deliberately adopted a constructive strategy with most of its clients, so as to assist them to face and overcome difficult economic and market conditions, as opposed to foreclosure on collateral, which in turn would drive many businesses into bankruptcy", MBSL said in a statement.
The bank said it believed the strategy will help the bank in the long term, and the issue of non-repayment was being addressed. The bank said it has adopted a more cautious attitude towards new lending due to what it called the 'pessimistic outlook on credit'.
In addition to Rs 37m loss for the quarter, the banks income has also fallen to Rs 210m for the Rs 213m recorded the previous year.
The bank's two local subsidiaries, MB Financial Services Ltd. (MBFSL) and Merchant Credit (MCSL) have yielded acceptable returns in the 3 months MBSL said.
The MCSL, the finance company in the group has contributed positively to results in a difficult marco environment, though there is a drop in new business.
The international subsidiary Nepal Sri Lanka Merchant Bank Ltd., has established operations. Performance to date has been budgeted, expectations and staff seconded for duty are contributing well, the Bank said.
Lanka Securities (Pvt) Ltd. (LSL), the stock broking associate has performed within budgets but recorded a "negative contribution" in the first three months of the year, MBSL said
Record losses that continue to be reported from most listed corporates have dashed hopes for a early recovery in the economy in spite of a low interest rate environment.
"Results are very poor", says Allied Philips Securities research chief Nouzab Fareed.
Except for a few companies others have reported lower profits or bigger losses. Some companies have also reported lower turnovers pointing to depressed demand. Success stories include Ceylon Breweries. While turnover rose to Rs 928mn from Rs 761mn for the year ended 31st March 1996, profits shot up to Rs 47.2mn from Rs 14.5mn. Ceylon Glass Company has posted a Rs 76mn profit against the Rs 81mn loss in 1995.
Though overdraft rates have come down from around 30 per cent to around 25 per cent businesses are facing added difficulties due to power cuts.
In addition to extra costs on account of generating their own power, businesses are facing cashflow problems due to disruptions in sales revenue Chamber officials say. As a result some companies were unable to pay salaries and other expenses including debt repayments.
This has also given rise to the possibility of mass scale payment defaults which may cause systemic instability in the banking sector.
"Some manufacturing companies have requested banks to re-schedule debt repayments," says Sherman Gunatilleke, banking analyst at HDF Securities. "It is difficult to say yet whether bad debt provisions have increased substantially during the first half of the year, but banks are taking strong steps to recover debts " he adds.
Trade Chambers have called for the suspension of the debt recovery laws of the country to prevent banks foreclosing on defaulting borrowers.
"Nobody is sure whether they should go in for investment or not", says Nouzab Fareed of Allied Phillips Securities.
The private sector generally blame the government for destroying the business confidence in the country, particularly statements and acts of some ministers who have cemented the opinion that the government is without direction. "It is not easy to build up confidence, even if interest rates are low," says one banker.
He cited the advancement of the clock by one hour without considering the full impact of such a decision. Personally he was happy with the decision as it gave bankers an extra hour to trade with top Asia trading centres such as Singapore and Japan before they closed. but this had created other problems such as for school children, with the government altering school times.
"This has resulted in traffic jams," he said. "The economic loss due to lost man hours, wasted fuel is immense", he says. "If the government makes a decision, it should stick to it instead making ad hoc changes that created more confusion.
Another major factor that caused a loss of business confidence is increased labour unrest and possible introduction of new labour laws such as the 'Workers Charter' that are perceived as making the labour market more rigid and therefore acting against new employment creation.
There are worrying signs that unemployment is on the rise. According to the latest data released by the Statistics Department uemployment has risen to 12.7 per cent in the third quarter of 1995 from 11.9 per cent in the second.
Chamber Chief Patrick Amerasinghe said recently that a large number or persons have lost jobs as a result of businesses closing down and retrenchment due to fears about new labour laws. He said even the Chamber Federation found it difficult to compile data as employers were unwilling to release figures on job cuts fearing that they would be victimised.
"The ground situation is that there has been a fair reduction of employment," Mr Amerasinghe said.
Singer Sri Lanka and Reckitt and Colman whose profits grew steadily last year have reported lower profits for the first quarter of 1996.
Some analysts however say this should be viewed positively rather that negatively as it may be the result of the exchange rate correction biting into their profits and is simply a part of the process of making Sri Lankan produced goods more price competitive.
While the tourism industry seems to be falling to new lows the tea industry is looking up. In a welcome development some listed corporates including those exporting rubber and coconut products have also reported better results and proposed expansion plans.
Coconut based Hayleys Exports (profits up to Rs 28mn from Rs 14mn) have announced plans to set up two new subsidiaries, while Dipped Products Ltd (DPL), a rubber based industry has also reported higher trading profits of Rs 147mn (up from Rs 99mn) though higher interest charges reduced net profits to Rs 87mn which were still higher than 1994.
Following the acquisition of a plantations company DPL says it is hoping to start several 'ambitious projects' in the wake of several smaller projects already set up in the areas of centrifuged latex, boron rubber wood and fruit cultivation. However DPL Chief Sunil Mendis told shareholders that there was a serious 'need to usher in labour market reforms that will create new employment'. "The Group's success in its new ventures especially in the plantations are contingent upon these factors," Mr. Mendis said.
Analysts hope that the proposed Employment Relations Act will go some way to address this problem.
Private investment fell last year to 22 per cent of GDP from 24 in 1994, according to Central Bank data. Foreign investment flows also fell 66 per cent to SDR 38mn in 1995.
In a positive development, the public issue of Tea Smallholder Factories was oversubscribed the week before. Analysts also welcomed the proposal for the government to offer insurance cover against terrorism for new investment in BOI administered industrial parks.
Most analysts however do not expect an early economic recovery with the 1996 GDP growth still forcast at around 4.5 per cent.
Asia Capital Ltd has reported group after tax profits of Rs 61.2mn up from Rs 1.6mn in 1995.
This has been arrived at after making a provision of Rs 4.5mn for falls in value of investments.
According to the interim accounts the bottomline was boosted by other income of Rs 149mn while the Group registered an operating loss of Rs 37mn.
A company statement said while the directors were disappointed at this result it was a reflection of the poor economic conditions in the country.
Asia Capital was also subject to a tax charge of Rs 46.3mn.
The company expects a lower tax charge next year but does not expect a significant improvement in trading in 1996. Lower interest rates would also depress returns on investment funds , the statement added.
However the company expects its core operations in securities trading, corporate finance, asset management and investment activities to pick up during 1997 and 1998.
In a recent judgement the Appeal Court has held that the retirement age of employees of plantations companies who were previously employed by the then Sri Lanka State Plantations Corporation (SLSPC) is 55.
The Appeal Court quashed a previous decision of the Commissioner of Labour re-instating the employee who had exceeded the age of retirement.
The Petitioner, Maskeliya Plantations had submitted that the age of retirement of SLSPC is 55 years and extentions beyond the age of 55 was on an yearly basis at the sole discretion of the management.
The Court also said the Commissioner of Labour should have given reasons for his decision.
"The present trend which is a rubric running throughout public law that those who give Administrative decisions where it involves the public whose rights are affected should give reasons for its decisions." the Court observed.
"The action of the Public Officers should be 'transparent' and they cannot make 'Blank Orders', the giving of reasons is one of the fundamnetals of good administration. In my view it is implicit in the requirment of a fair hearing to give reasons for its decisions. The present trend is to give reasons, and that a failure to do so amount to a failure to be manifestly to be doing justice." the Court said.
Tourism arrivals to Sri Lanka up to April had fallen by one third Ceylon Tourist Board Statistics has revealed.
January arrivals fell by 32 per cent, February 30 per cent, March 34 per cent and April 39 per cent.
Arrivals from Westen Europe, the largest generating market has fallen by 47.5 per cent in April.
Trourist arrivals on Air Lanka up to April had fallen to 25,900 from 39,500.
While almost all scheduled carriers and charter operators showed a decline British Airways which did not operate last year brought in 4,100 tourists.
Occupancy rates among 135 hotels included in the Tourist Board statistics had dropped to 40 per cent in March from 65 per cent last year.
Most listed hotels have reported losses inclduing Pegasus Hotels (Rs 6.3mn), Serendib Holiday (Rs 0.37mn), Miramaha Beach (Rs 7.37mn) according data released by Allied Phillips Securities.
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